Recro Pharma, Inc.
Q3 2021 Earnings Call Transcript

Published: 10 Nov 2021

[Operator:]

Good day, ladies and gentlemen, and welcome to the Recro Third Quarter 2021 Financial Results Conference Call. As a reminder, this conference call may be recorded. I would now like to hand the conference over to Stephanie Diaz of Recro’s Investor Relations Group. Please go ahead.

[Stephanie Diaz:]

Thank you. Hello and thank you for joining us. On today’s call, we have David Enloe, President and CEO and Ryan Lake, Chief Financial Officer. Today, we will be providing an overview of Recro’s contract development and manufacturing business, including updates on corporate activities and financial results for the quarter ended September 30, 2021. After our prepared remarks, we will welcome your questions. Before we begin, I’d like to caution that comments made during this conference call today, November 9, 2021, will contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, concerning the current beliefs of the company, which involve a number of assumptions, risks and uncertainties. Actual results could differ from these statements and the company undertakes no obligation to revise or update any statement made today. I encourage you to review all of the company’s filings with the Securities and Exchange Commission concerning these and other matters. Our earnings press release and this call will include discussion of certain non-GAAP information. You can find our earnings press release, including relevant non-GAAP reconciliations, on our corporate website at recrocdmo.com. With that, I will turn the call over to David Enloe, Recro’s President and CEO.

[David Enloe:]

Thank you, Stephanie, and thank you to everyone who has dialed in and to those who are participating today via webcast. During the third quarter, Recro significantly increased and accelerated its growth trajectory through the acquisition of IriSys, a CDMO with capabilities that greatly complement our own. We believe that through the joining of these two companies, we have created an organization best positioned to achieve sustainable growth and profitability. The impact of the company’s broadened geographic footprint and expanded service offerings facilitated a number of new business wins during the period spanning the full range of Recro’s capabilities at both locations, including new client contracts for oral solid dose projects to be carried out in Georgia, new client contracts for advanced dosage formats to be performed in San Diego, expanded contracts with existing clients in both Georgia and San Diego, contracts for commercial production as well as contracts for clinical trial materials. A contract that will utilize the high potency suite recently put into operation in Georgia and contracts for clinical trial services such as packaging and labeling. I will provide details on each of these achievements following an overview of our Q3 and 9-month financial results. For that, I will turn the call over to Ryan.

[Ryan Lake:]

Thank you, David. Good afternoon, everyone. Before I begin, in addition to the brief financial overview, I’ll provide on the call today, additional details on our financial results for the third quarter and 9 months ended September 30, 2021, are included in our press release issued prior to this call and in our Form 10-Q, which was filed today with the SEC. I’ll begin with an overview of our financial results for the third quarter. Revenues for the quarter ended September 30, 2021, were $18.2 million. This represents a 6% decrease compared to revenues of $19.3 million recorded during the prior year period. The decrease of $1.1 million was primarily the result of decreased product sales due to timing of customer orders. This decrease was partially offset by increases in revenue due to the acquisition of IriSys as well as higher revenues from our clinical trial materials business, including revenue from the Otsuka commercial product tech transfer project. Cost of sales for the quarter ended September 30, 2021, was $13.2 million compared to $11.7 million for the comparable period of 2020. The increase of $1.5 million was primarily due to costs from the San Diego facility due to the acquisition of IriSys and is partially offset by lower costs due to certain employment incentive tax credits in 2021. Selling, general and administrative expenses for the third quarter were $4.6 million compared to $4.4 million recorded in the 2020 period. The increase of $0.2 million was primarily associated with deal and integration costs related to the acquisition of IriSys and business development expenses associated with our San Diego team offset by lower public company costs and stock-based compensation expense. Interest expense was $3.8 million for the 3 months ended September 30, 2021, a decrease compared to $4.6 million for the comparable period of 2020. The decrease of $0.8 million was primarily due to reduced term loan borrowings under the Credit Agreement with Athyrium as well as a decrease in the LIBOR base rate of interest on our term loans under the Credit Agreement. This decrease was partially offset by an increase in interest from the seller’s note, which was a component of the IriSys acquisition purchase price. For the quarter ended September 30, 2021, the company recorded a net loss of $3.5 million or $0.07 per diluted share as compared to a net loss of $2.1 million or $0.09 per diluted share for the comparable period of 2020. EBITDA as adjusted for the period was $5.3 million compared to $6.3 million in the prior year period. I will now provide an overview of our financial results for the 9-month period. Revenues for the 9 months ended September 30, 2021, was $53.1 million compared to $56.6 million for the same period in 2020. The decrease of $3.5 million in revenue was primarily the result of the discontinuation of two commercial product lines by our commercial partners announced in the first quarter of 2020. During the 2021 period, increased product sales from one of our commercial partners increased revenue due to the acquisition of IriSys as well as higher revenues from our clinical trial materials, new business growth activities have partially offset the decrease. Cost of sales for the 9 months ended September 30, 2021, was $39.8 million compared to $41.6 million for the same period in 2020. The cost of sales decrease of $1.8 million was primarily due to lower commercial manufacturing volumes and reflects lower costs due to the prior year reduction in force as well as certain employment incentive tax credits in 2021 offset by costs from the San Diego facility due to the acquisition of IriSys. Selling, general and administrative expenses for the 9 months ended September 30, 2021, were $13.1 million compared to $14.1 million for the same period in 2020. The decrease of $1 million was primarily related to lower public company costs and stock-based compensation expense, offset by expenses related to the acquisition of IriSys and the business development expenses associated with IriSys. Interest expense was $11.7 million and $14.7 million during the 9 months ended September 30, 2021 and 2020, respectively. The decrease of $3 million was primarily due to the successful refinancing and reduced term loan borrowings under the Credit Agreement with Athyrium as well as a decrease in the LIBOR-based rate of interest on our term loans under the Credit Agreement. This decrease was partially offset by an increase in interest from the seller’s note, which was a component of the IriSys acquisition purchase price. For the 9 months ended September 30, 2021, Recro reported a net loss of $9 million or $0.22 per diluted share compared to a net loss of $15.8 million or $0.67 per diluted share for the comparable period in 2020. EBITDA as adjusted for the period was $13.4 million compared to $13.7 million in the prior year period. Our cash and cash equivalents as of September 30, 2021, were $23.5 million compared to $23.8 million as of the end of the prior fiscal year. As a result of Recro’s acquisition of IriSys, the company is increasing its revenue guidance for the full year 2021 to be in a range of $74 million to $76 million with an EBITDA as adjusted target range of $16 million to $18 million and a net loss range of $11.6 million to $13.6 million. This concludes my financial overview, and I’ll now turn the call back over to David for an update on operations and achievements during the period. David?

[David Enloe:]

Thanks, Ryan. The third quarter was a busy and exciting time at Recro, driven primarily by the company’s acquisition of IriSys Inc., a San Diego-based CDMO in August, Recro made substantial progress with each of the company’s strategic goals as outlined earlier in the year. These 4 goals are

[Operator:]

Our first question comes from the line of Matt Hewitt of Craig-Hallum Capital. Your line is open.

[Matt Hewitt:]

Good afternoon. Thank you for taking our questions, and congratulations on the progress during the quarter. A couple for me. First up, regarding the Otsuka Master Agreement, could you provide an update on the timing or your expectations on when that tech transfer could be complete and when you would maybe start actually manufacturing product for them on that specific agreement? And then regarding that Master Supply Agreement, they obviously have a couple of other branded drugs that are already commercial here in the states. Are you in discussions with them to potentially be manufacturing the others for them as well?

[David Enloe:]

Hi, Matt, David Enloe here. Thanks for the questions. With respect to the first question, I’ll defer to Ryan. But on the other question of a more broad relationship with Otsuka, Obviously, we can’t comment on all the discussions we have, other than to say that it is becoming more and more important to not just them, but to others that they have secure supply chain sourced in the United States going forward. And we look forward to continuing to do a good job with the work that we have and see where that takes us from a relationship perspective. Ryan, do you want to touch on the timing of the current check transfer though?

[Ryan Lake:]

Yes. So Matt, we’re extremely excited about this relationship. We are still on track with the registration batches for the end of this year and beginning of next year. And we expect to begin manufacturing commercial quantities of the product in the second half of 2022.

[Matt Hewitt:]

Got it. Alright, thank you for that. And then maybe a separate question. It sounds like you had a very successful quarter as far as the pipeline is concerned. Are there any types – or are there any metrics or any, like, a net new number of contracts added during the quarter or anything along those lines that you could provide, just to help us understand the numbers there?

[Ryan Lake:]

Good question, Matt. I think we certainly showed a lot of progress this quarter with adding new business. We have a healthy pipeline. I would say that the pipeline is kind of in the mid- to high $20 million range of outstanding proposals. And as far as anticipated backlog, it’s in the mid-teens range. So this is really as high as it’s ever been at Recro. So very excited with the progress that we’re making there.

[Matt Hewitt:]

That’s great. Thank you very much.

[David Enloe:]

Thank you, Matt.

[Operator:]

Thank you. Our next question comes from Christine Rains of William Blair. Your line is open.

[Christine Rains:]

Hi, good afternoon, and congrats on the quarter. My first question is just about 2022 guidance. I imagine you’re not giving any specifics here, but any sort of top line growth targets on an organic and inorganic basis? And then anything on EBITDA margin trajectory or do you expect any unusual nonrecurring items, like, the employee retention credit that you had in 2021 that are expected to affect 2022 financials?

[Ryan Lake:]

Thanks for the question, Christine. As was the case this year, we expect to continue to outpace the oral solid dose, small molecule growth rate next year, which is in the mid-single-digit range from a top line perspective. And we really have several different revenue pathways that we evaluate, the revenue trajectory for each of those in order to come up with a blended growth trajectory. The legacy commercial revenue from our existing commercial products kind of absent the impact of COVID has historically been fairly stable and is expected to be consistent or perhaps slightly lower next year than this year. And perhaps we’re being a little bit conservative there and we will see more of a rebound in the pediatrics or ADHD space to pre-pandemic levels, but it’s still too early to tell. From a new business growth perspective, we’re expected to outpace the small molecule market growth rate. And as David mentioned, we’re making good progress in this area and you heard the response to where we’re at from a pipeline perspective in backlog. As we look at the capabilities for our growth from the recent acquisition of the San Diego business, there are several growth areas, including the aseptic fill-finish and lyophilization where we’re just getting started. And the industry growth for that, for sterile injectables is in the 9% to 10% range. So overall, from a top line perspective, we feel that we’re well positioned in the market with our long-standing commercial history and robust capabilities to capture this growth curve in the marketplace. And we are a growth story and believe that we’re undervalued in the market. With regard to your question about kind of one-time and expectations from an operating expense level, I think from very macro level, as you’re aware, there is a lot of inflationary and wage pressure, salaries, freight, supply costs are all increasing and creating headwinds from a margin pressure perspective. And what I would say for next year is that, year-over-year, excluding the approximate $4 million to $5 million of federal employment COVID-related incentive tax credits in that we experienced in 2021 or if you use as a baseline for this year, EBITDA would be an estimated $13 million to $14 million, we expect an increase in EBITDA from those adjusted levels as a result of revenue growth and efficiencies from higher utilization, offset through the negative pressures on EBITDA for margins due to wage and inflationary pressure as well as the increased revenues from the IriSys acquisition, which currently has lower margins.

[Christine Rains:]

Thanks. That was a really helpful answer, Ryan. Then my second question has to do about a little bit more specifics about the IriSys acquisition integration. First half, can you just give me an idea of the contribution of IriSys on both the top line and perhaps EBITDA for the quarter just to get at that sort of organic growth rate? And then just how is the integration going at a high level? Are you guys actually merging sales teams? Are you deciding them to separate? Are you seeing a lot of cross-selling opportunities with IriSys from your legacy business? Just any color there would be helpful.

[David Enloe:]

Yes, this is David. Let me start with that part first. There is been a lot of activity, and we’re seeing, quite frankly, more traction sooner than I had anticipated just because of the operational synergies of the leadership that we can bring forth to helping IriSys step into more advanced clinical programs. And particularly in the quality and regulatory area, EH&S, all of the things that would be required for a company that was IriSys’ size pre-acquisition to step up to that next level, legacy Recro has been through all of those things for years and years and decades. And so it’s been, for me, very confirming and rewarding to watch the teams worked so well together. Tim Burke coming in as a person I had known from the past and worked with in the past, and that’s been helpful, too, in terms of really bringing forth a little bit more of a, I guess, I’ll call it an industrial approach with more metrics and KPIs. And I would just say that overall, things have been well embraced and we’re moving forward at a good clip. The business development efforts and marketing efforts are singular. They are not separate. They are one team. And we’re seeing a lot of cross-selling opportunities and discussions there. I’m literally going to dinner tonight with one of those. And so I think – I would say, that from a cultural synergy and a fit perspective, we’re ahead of where I would have figured we have been, and this is a place that I have a lot of experiences merging companies together and integrating them into one. Ryan, can you touch on the specific question about the dollars impact this quarter?

[Ryan Lake:]

Yes. So for the quarter, the IriSys has contributed about $1.5 million in revenue and positive EBITDA associated with that, Christine.

[Christine Rains:]

Thank you.

[David Enloe:]

Thanks, Christine.

[Operator:]

Thank you. At this time, I’d like to turn the call back over to David Enloe for closing remarks. Sir?

[David Enloe:]

Thank you very much. In the first 9 months of 2021, as our recent contract wins have demonstrated, Recro has now transformed itself from a niche CDMO specializing in oral solid dose work to a true growth CDMO. Today, our organization has offerings in essentially all dosage forms for small molecule therapeutics, locations on both coasts of the U.S., a strong quality and regulatory track record and the benefit of owning and profitably producing verapamil, a successful legacy product. But fundamentally, it’s our employees, new and existing that build and drive our business, and I’m thankful for their commitment and collaboration of our employees, and I look forward to the future successes of our exceptional team. Thank you again for participating today and for your continued support of Recro.

[Operator:]

This concludes today’s conference call. Thank you for participating. You may now disconnect.